Saturday, August 13, 2011

Kocherlakota Elaboration: An Update

Thoma accuses Kocherlakota of cherry-picking the data, then proceeds to cherry-pick. Krugman points out that the employment/population ratio is still low, but it's not so different from where it was in November 2010, which seems consistent with Kocherlakota's argument. Thoma thinks the Fed has not really committed:

Finally, this is not a rock solid commitment from the Fed. This is their view of the most likely path for the federal funds rate, they have not said this is what they will do independent of how the data evolve. All they have said is that economic conditions are likely to warrant this outcome.

I'm afraid not, Mark. As I argued here, something very dramatic will have to happen for them to go back on their word.

Finally, Krugman states this:

So this isn’t fact-based policy. The Fed dissenters are obviously looking for excuses to pursue tight policies; they’re looking at the facts only in search of support for their prejudices. As the old line goes, they’re using evidence the way a drunk uses a lamppost: for support, not illumination.

This is of course grossly insulting. He's not accusing Kocherlakota of faulty reasoning. Apparently his crime is that he has an unstated agenda, and he's picking the data to support his narrative. Actually, that's Krugman's crime. Narayana, as long as I have known him, has been honest and straightforward, even when it hurts. Whatever it is that he is thinking, he'll let you know, as I think he has done here.

19 comments:

As for cherry picking, Kocherlakota picked the recent peak in the unemployment rate to make his case -- but if you look at other periods, the story differs. Making that point isn't cherry-picking in return, but nice try.

And you may as well accuse the entire FED of cherry picking -- you do realize that the FOMC marked down its forecast don't you? Yet you and Kocherlakota are arguing things are better? Are you really saying, as you did in your last post, that yKocherlakota's (and your) forecast of the future has improved with recent data? If so, you are in a pretty lonely space:

"Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed."

Yep, as you claimed, things are improving just as the Fed thought they would! Oh wait.

And you really ought to stop embarrassing yourself with your petty jealousies over Krugman. When, say, Stiglitz says the same things, you don't say a word, but Krugman? Makes you embarrass yourself every time. You should ask yourself why that is. I know it must be hard to see someone with a Nobel prize get more attention than you with your wonderful model the world won't embrace and has all but ignored, but, well, that's life. Get over it.

I do not have a Nobel prize, nor much economic understanding whatever. But I am confused by Kocherlokota's comments even if you accept the premise that things are getting better. Since we are at the "zero bound" (I hope I am using that right) on shorter term rates, isn't it the case that things can get better but still not justify a rate increase. Maybe the ideal rate has gone from, say -1.5% to -1%. Does that by itself justify an increase in the (positive) short term rate?. Also, I think it would be good to defend the Kocherlokota dissent with real data, to show that he is not cherry picking, so that those of use who are unsophisitcated at looking at such data can undersand.

As defense of you, Dr Williamson, I will say that your critique of Dr. Krugman, though sometimes needlessly personal, is usually backed by significant substance. I do not think he reciprocates, and he is insultingly dismissive without engaging your ideas. That stikes me as unsporting.

Thoma gets even more angry...Nov 2010 is not cherry-picked, but rather is the date of the last real change in Fed policy with the QE2 announcement. Apart from ad hominem, the issue has to be whether the economic outlook has changed since Nov 2010. Kocherlakota seems to argue that at the least that it hasn't gotten worse. The majority of the FOMC seems to think it has. Both seem defensible positions, not "prejudice".

It's funny, "Mark," that you make the comparison between Krugman and Stiglitz. Stiglitz has made it pretty clear that he thinks monetary policy is ineffective right now, and QE2 didn't do much of anything. Krugman ostensibly believes the same thing ("liquidity trap!" "zero lower bound!" "we need fiscal policy!" etc.), but still likes to chime in on monetary policy as a means of carrying on methodological squabbles from three decades ago and confusing them with partisam divisions.

Think what you will of Stiglitz's views (and I personally think very highly of them and of him) but at least he's consistent.

I don't always defend Narayana. If he has a bad idea, I generally take him to task for it. And that's a good point. This is about ideas. Nothing personal, either with you or your friend Paul. I'm sure Paul and I could spend the day together, have a good time, talk about our cats, then go to the polling both and vote the same way.

There's an important issue here that you bring up, and we should focus on that. Kocherlakota's defense, which I think by design is framed in as simple a way as possible, is premised on the idea that the current policy setting is determined by the current state. In some versions of the Taylor rule, that's exactly it. The current state is given by the current inflation rate and the current output gap. If you measure the output gap in terms of the unemployment rate, Narayana is saying that the state looks better today on both dimensions than it did in November 2010. If the FOMC did not deem it necessary to commit 2 years out in November 2010, they should not want to do it now. Thus, it's just an arguement for consistency. Now, what you seem to be arguing, I think, is that the November 2010 policy was predicated on a particular forecast. Some of the outcomes since November 2010 were worse than expected, and the forecast going foreward from the current date is now more pessimistic than previously. You are apparently arguing that our view about the future matters, in addition to the current state. That certainly may be the case. Maybe you are a New Keynesian with a different view about the appropriate Taylor rule? Maybe you have some other ideas about why the future matters? I'm all ears.

Anonymous,

"I do not think he reciprocates, and he is insultingly dismissive without engaging your ideas. That stikes me as unsporting."

Isn´t time to get rid of Inflation Targeting? Why over the last decade there have been many papers and conferences on the topic of "Monetary policy in a low inflation environment", indicating that maybe MP should "change"?http://thefaintofheart.wordpress.com/2011/08/13/usjapan/

Steve: Why do you feel the need to often emphasize that, though your thoughts about monetary policy may strike some as rather 'conservative,' you & PK probably pull the same levers in the voting booth?

"Krugman points out that the employment/population ratio is still low, but it's not so different from where it was in November 2010, which seems consistent with Kocherlakota's argument."

You'd like Kocherlakota to be saying that things haven't changed so no change in policy is needed. But he's just not saying that.Kocherlakota basis his dissent on a claim that the employment picture has improved:

"At the same time, while unemployment does remain disturbingly high, it has fallen since November.I can summarize my reasoning as follows... Since November, inflation has risen and unemployment has fallen."

If that change unemployment is just a statistical illusion because all that has happened is discouraged people moving out of the work force (discouraged because average duration of unemployment is at extremely heights) - then that ratio staying level is exactly what you'd expect to see and the "facts" Kocherlakota are claiming as support his reasoning just aren't facts at all.

Of course, Krugman's criticism fails if you think something else is moving people out of the workforce. But if Kocherlakota thinks that then he owes an explanation, since Occam's razor suggests that the crappy state of the economy - the high unemployment rate and extraordinarily high mean duration of unemployment - are what is responsible for that move.

I'm with Krugman. The facts Kocherlakota quotes in support of his position aren't facts at all.

The Taylor rule indicates 0 interest rates for now, unless you take John Taylor's version who subscribes to an uberhawkish weight for inflation and even then you don't end up with funds rate significantly higher.

But NK did not dissent to the interest rates. He dissented to the 2y commitment. For that, the Taylor rule is not very relevant, unless you have some good estimates of where the unemployment gap and inflation rate is going to be. And if you take some market indication of the inflation rates in say a year (my favourite is the TIPS-treasuries spread), you see that the market is expecting close no inflation.

Of course you could counter something like "screw the market, NK knows better", but then again, if the Fed can forecast inflation better than the bond market, I don't see how you can coherently argue against fiscal stimulus.If the government bankers can forecast the future better than the market, then the same should be true about other branches of the government vs. the private sector, unless you have a better explanation.

If my reading of optimal monetary policy in the New Keynesian literature is correct, the only reason the Taylor rule makes sense is because current inflation and output gap are good predictors of future inflation and output gap. I a more complex world where this is not the case, then the Taylor rule is a bad rule to follow. (example if you think stock market is a good predictor of future output-gap).

Actually, it's debatable whether the Taylor rule even makes sense given the New Keynesian model. What we can say for sure is that we would have an optimal policy if we could replicate the equilibrium allocation we would get if prices and wages were flexible in that environment. I've never been convinced that it's a Taylor rule that gives you that.

That depends. Think of it as journalism. In that sense, he's better qualified than some people who write about economics in the old-fashioned media, and elsewhere in the blogosphere. In any event, I think we can evaluate the quality of his blogosphere output independently of his academic output, though the academic output is certainly informative if you want to understand where he is coming from.